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From real estate to inflation, here’s what to expect from the economy in 2022

From real estate to inflation, here's what to expect from the economy in 2022
Written by Publishing Team

After the second year in a row that “unprecedented” achieved more than its fair share of narrative heavy lifting, economists are looking to 2022 with a sense of caution: The uncertain intensity of the omicron variable and sharply escalating prices cast a double shadow over forecasters’ forecasts, but some do not. In the face of this unknown, he still finds cause for optimism.

“2022 is what I will call the transition to normalcy,” said Eric Deaton, president and managing director of investment advisory firm The Wealth Alliance. “It means that the global economy will continue to grow, but not at the rates we saw around 2021. It means that inflation will remain stubborn – but going into the latter part of 2022, I think we are going to resolve a lot of these supply chain and employment issues.

Here are the top problems economists have on their radar for 2022:

epidemic

The fast-moving omicron variant of Covid-19 has proven to be the biggest wild card in the near term. “The first part of 2022 is likely to see another temporary slowdown in economic growth as rising Omicron cases hit the discretionary services sector,” said Ian Shepherdson, chief economist at Pantheon Macro Economics, in a recent research note.

Initial indications are pointing to a less-lethal outcome, said Liz Young, chief investment officer at SoFi, making forecasters cautiously optimistic. She said the US is now in a better position than it was a year ago or even when the delta variable caused an increase in the number of cases in the summer and early fall.

“The healthcare system at this point is very well prepared to pivot and create different forms of vaccines and different forms of treatments as new variants emerge,” Young said. As a result, the extensions of market volatility that accompanied each new variable and the subsequent rally have become more muted. “These reactions are getting shorter and shorter,” she said.

However, experts acknowledged that the epidemiological turn for the worse could erode the prevailing view in the markets that successive waves of Covid will continue to affect the economy less.

housing market

According to data from the National Association of Realtors, the median current home price rose to just under $354,000 as of November (the latest month for which data is available), an annual increase of about 14 percent. Economists predict that the prospect of higher interest rates could act as a brake on future home price gains in 2022, as paying more for mortgage servicing leaves homebuyers with less money to spend each month on payments.

Higher interest rates could act as a brake on future home price gains in 2022.

Real estate activity will pick up in the first half of the year as buyers and sellers alike scramble to close deals before any price increase occurs, Daryl Fairweather, chief economist at online real estate platform Redfin, said in a new report. It expects 30-year mortgage rates to rise from their current level of about 3 percent to 3.6 percent by the end of next year, an increase that will translate to an average of $100 more per month. Despite the price pressures, Fairweather expects home prices to rise just 3 percent in 2022.

But while home prices may come down, renters won’t see any kind of relief yet. “Rents are increasing in double digits,” said Jay Hatfield, founder and CEO of Infrastructure Capital Management.

If the government were still calculating inflation today using the same models it used in the 1970s, the sharp rise in rental costs that occurred in 2021 would have been reflected in a real inflation rate north of 10 percent – one of the main reasons why the current inflationary climate has created greater financial challenges for renters . “This has never happened before. We haven’t had this kind of national rent inflation,” Hatfield said.

Fairweather forecast another year of rising rents, forecasting a 7 percent increase nationwide in 2022. “Demand for rents will be strong for several reasons,” she said. “The end of mortgage tolerance will result in many homeowners selling and renting instead. As the pandemic subsides, more people will choose to live in cities where rent is more common.” In addition, she said, the booming job market, and the ability of many workers in the knowledge economy to perform their jobs remotely, could also lead to increased demand for rents if the newly arrived residents want to rent before buying a home.

Economists say home supply will continue to be a problem. A June report commissioned by NAR found that the US housing market has a supply-demand gap of 6.8 million units, and that rising materials and labor prices will make closing that gap more difficult.

Stock market

Despite bouts of volatility, 2021 has been a rough year for stocks, with stocks hitting new record highs on a regular basis. With all of these gains except for the rear-view mirror, market specialists anticipate a return to sobriety next year.

“In 2022 we will look at the fundamentals of that more closely,” Young said.

One of the big open questions is whether, when and to what extent the service sector – which comprises a large slice of economic output and jobs – can recover in 2022. “If the service sector comes back… I think the worst of the reaction is already behind us,” she said.

“If we start looking at … what it looks like is going to be priced in the stock market is just a massive amount of demand for financial assets,” said John Cunnison, chief investment officer at Baker Bower Bank.

Cunnison retracted the assumption that rising asset prices would necessarily lead to a hard landing. “This is not a dichotomous finding,” he said. “You can grow to high prices. Dividends can continue to grow strongly at current prices.”

If 2021 is full of hope for the future, though, experts say investors will use corporate earnings as a window into the health of the American consumer, and thus the country’s economic growth.

“What we are watching is the relative performance between the consumer goods segment and the consumer goods segment,” said David Wagner, portfolio manager and analyst at Aptus Capital Advisors. A drop in unnecessary spending could mean higher prices are starting to put pressure on consumer spending, which could herald upcoming economic pain that could spill over into other categories of spending, slashing profits and causing deflation on Wall Street.

Labor market

It wouldn’t be an exaggeration to call 2021 the year of the worker, and experts said the new year is likely to reflect more of the same — at least initially. “In the long term, I think we will continue to see a shortage of labor…but in the next year or so, the situation will improve,” Wagner predicted.

Consulting firm Deloitte found in a recent survey of CFOs that companies expect to invest and spend on equipment, technology and human capital in 2022. “The significant increase in local employment and local wages will continue,” said Steve Galucci. Leader of the North American CFO program at Deloitte.

Early retirement moved more than a million workers out of the labor pool.

However, Federal Reserve Chairman Jerome Powell acknowledged that policymakers are puzzled by how low the labor force participation rate will remain in 2021. In the new year, experts say the US workforce will approach its pre-pandemic standards, but rise to A certain extent. Some of the changes that Covid-19 has brought about will likely be, if not permanent, long-term in the labor market.

“I think workforce participation remains below the level it was before the pandemic,” Young said.

Early retirement, by many estimates, has taken more than a million workers out of the workforce. “We are not going to replace these people,” Young said. “This is something we just need to anticipate.

inflation

The topic of inflation is critical because it touches many aspects of the economic landscape: Federal Reserve policy and the interest rates paid by borrowers, as well as the prices of goods and services purchased by individuals and businesses.

“I would argue that what we’re seeing now with inflation is a combination of two things. It’s a perfect storm,” said Brad MacMillan, CIO, Commonwealth Financial Network. The high demand for goods caused by the service sector shutdown and the supportive monetary and fiscal policy that was put in place The year 2020 is on a collision course with the global supply chain already having sand poured into its gears.

One bright spot is the high rates of savings still held by many American families.

“All of a sudden, the demand for things went up just as the supply of things went down. The question now is, is that going to last?” MacMillan said.

One bright spot is the high rates of cumulative savings that many American families still hold. Bank data shows that these reserves are dwindling, but some experts have expressed hope that they will last long enough to act as a buffer against rising inflationary pressures.

“I think the basic idea here — which gives Jerome Powell more flexibility — is that the net worth of the American family continues to increase exponentially,” Wagner said. Shepherdson estimated that American households will draw down $600 billion in savings in 2022.

Markets were pricing in three interest rate hikes in 2022 for most of the last quarter of 2021, a reality that was reflected in the economic forecasts given by members of the Federal Reserve’s policy-making committee in December. The big unanswered question is whether this will be the right amount of tightening for the economy that was not expected at all over the past 22 months.

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